RESPA, which stands for the Real Estate Settlement Procedures Act, is a federal consumer protection law designed to provide transparency throughout the real estate settlement process. Intended to prevent abusive or predatory settlement practices, it requires mortgage lenders, brokers and other loan servicers to provide complete settlement disclosures to borrowers, prohibits kickbacks and inflated referral fees and sets limitations on escrow accounts.
At a Glance
- RESPA impacts anyone involved in a residential real estate transaction for a one to four-family unit with a federally related mortgage loan, including: home owners, business owners, mortgage brokers, lenders, builders, developers, title companies, home warranty firms, attorneys, real estate brokers and agents.
- Its purpose is to combat unethical “bait-and-switch" settlement practices, including kickbacks, hidden costs, inflated referral and service fees and excessive or unfair escrow requirements.
- It is codified at Title 12, Chapter 27 of the United States Code, 12 U.S.C. §§ 2601-2617
- It requires disclosure at four key points in the settlement process, beginning when the loan application begins.
- Violations come with heavy fines and penalties, which can result in imprisonment in severe cases.
- Exceptions and certain activities are allowed for real estate professionals and related service providers to work collaboratively or engage in cooperate marketing.
History
RESPA was passed by Congress in 1974 and became effective the following summer in June 1975. Since then, it has been amended and updated which has led to some confusion at times about what the Act covers and what regulations are included. Originally under the administration of the Department of Housing and Urban Development (HUD), it was transferred to the Consumer Financial Protection Bureau (CFPB) in 2011 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection legislation. The Act applies to all loans or settlements for buyers in residential real estate transactions for one to four family units.
Disclosures
Lenders are required to provide settlement disclosures and corresponding documents to borrowers at four key stages throughout the home buying or selling process:
At the Time of Loan Application
When a potential borrower requests a mortgage loan application, the lender must provide the following materials at the time of the application or within three days of the application:
- Special Information Booklet must be provided to the borrower for all purchase transactions, though it is not required for borrowers applying for a refinance, subordinate lien or reverse mortgage loan. The booklet should include the following items:
- Overview and detailed explanation of all closing costs
- Explanation and example of the RESPA settlement form
- Overview and detailed explanation of escrow accounts
- Choices for settlement providers available to borrowers
- Explanation of various kinds of unfair or unethical practices that borrowers may encounter during the settlement process
- Good Faith Estimate (GFE) that includes a breakdown of the total estimated costs a borrower will be responsible for at the time of settlement. The GFE should include, but is not limited to, the following items:
- Origination charges, such as application and processing fees
- Estimates for required services, such as appraisals, attorney fees, credit report fees, surveys or flood certification
- Title search and insurance
- Per diem and interim accrued interest
- Escrow account deposits
- Insurance premiums
- Mortgaging Service Disclosure Statement affirming whether the lender intends to service the loan themselves or transfer it to another lender. This document must also include information about complaint resolution, providing the steps borrowers can take to resolve any complaints they may have in the process.
Before Settlement
Lenders are required to provide the following materials before closing:
- Affiliated Business Arrangement (ABA) Disclosure is required to inform the borrower of any financial interest a broker or real estate agent has in another settlement provider, such as a mortgage financing or title insurance provider they have referred the borrower to. It’s important to note that RESPA restricts the lender from requiring the borrower to use a particular provider in most cases.
- HUD-1 Settlement Statement that includes a complete list of all fees both the borrower and seller will be charged at the time of closing.
At Settlement
Lenders are required to provide the following materials as the time of closing:
- HUD-1 Settlement Statement with the actual settlement costs.
- Initial Escrow Statement itemizing the estimated insurance premiums, taxes and other charges that will need to be paid by the escrow account during the first year, in addition to the monthly escrow payment.
After Settlement
Lenders must provide the following materials after the settlement has closed:
- Annual Escrow Statement summarizing all payments, escrow shortages or surpluses, actions needed and including the outstanding balance must be provided once a year to the borrower during the length of the loan.
- Servicing Transfer Statement is required in the case of the lender selling, transferring or reassigning the borrower’s loan to another service provider.
Violations
It is critical for all real estate professionals and lenders to be aware of RESPA rules and regulations. Thoroughly read not only the regulations, but also the HUD clarifying document carefully to ensure you are in accordance with the law. Violating the Act can result is hefty fines and even imprisonment, depending on the severity of the case. In 2019, the CFPB raised fines for RESPA violations, further emphasizing the importance of staying informed about the pertinent requirements and restrictions related to the Act. Some of the most common, real world RESPA violations include:
Giving Gifts in Exchange for Referrals
Section 8 explicitly prohibits a real estate agent or broker from giving or receiving “any fee, kickback,
or thing of value” in exchange for a referral. This applies to monetary and non-monetary gifts of any
size or dollar amount, and can include payments, advanced payments, funds, loans, services, stocks,
dividends, royalties, tangible gifts, giveaway prizes and credits, among other things.
Some examples of this violation might include:
- A “Refer-a-Friend” program where those who submit referrals are entered into a giveaway contest
- Trading or accepting marketing services for referrals
- An all-expenses-paid vacation provided by a title representative to a broker
- A broker hosting quarterly happy hours or dinners for agents
Marking Up or Splitting Fees
Section 8 also prohibits tacking on additional fees when no additional work has been done or for inflating the cost of common service fees. Fees can only be applied when actual work has been done and documented, and the costs charged to borrowers must be reasonable and in line with fair market value. An example of this violation might include an administrative service fee charged for the “full package” of services offered by a broker.
Inflating Standard Service Costs
In addition to prohibiting fee splitting and mark ups, RESPA also prohibits inflating standard service
costs. Borrowers can only be charged the actual cost of third-party services. Violations of this could
include charging a borrower more for a third-party service, such as a credit report, than was paid for
the service.
Using Shell Entities to Obscure Funds
A shell company, which has no office or employees, is created to manage another company’s financial assets, holdings or transactions. Funneling payments through a shell company goes against RESPA’s anti-kickback provisions. A real estate company creating a shell account to charge borrowers for additional services and fees would be in clear violation.
Exceptions and Allowed Activities
Though it can be difficult to navigate the strict regulations, there are exceptions and allowed activities for referral arrangements. Examples of allowed activities include:
- Promotional and educational opportunities.Service providers can attend specific events to promote their particular business. It must be clear that the representative is there on behalf of their company and is only promoting or educating attendees about their own company. An example of this might include title company representatives attending and promoting their company at an open house with clearly labeled promotional items.
- Actual goods and services provided. Payments can be made for tangible goods and services provided, as needed and at a fair market value, such as a real estate company renting conferencing rooms to a broker for the standard cost. Overpayment for a good or service provided may be considered a kickback, violating the statute’s regulations.
- Affiliated business arrangements. If these arrangements are clearly and properly disclosed at the appropriate time during the settlement process, these arrangements do not violate RESPA’s regulations. This could look like a real estate broker has a borrower sign an Affiliated Business Arrangement Disclosure form indicating a title company he or she has financial interest in.
- Shared marketing efforts.Service providers can divide and conquer marketing efforts if both parties fairly share the costs according to usage, such as buying a print or digital ad and evenly splitting the cost and space between the two businesses.
Maintaining the guidelines to avoid violating RESPA may feel like a slippery slope, and the stakes are high for misinterpretations of the law, even when made in good faith. As tricky as RESPA can be, it makes good sense to get legal advice from a trusted source. If you have any questions or are worried about a violation, {BRAND} offers its’ clients access to one full (1) hour of free legal consultation with our real estate legal advice team.
Reach out to us at [contact info] and speak to a RESPA expert today.